SilverLink - Spring/Summer 2008 - (Page 27)

PRIVATE CLIENT SERVICES Personal Insurance Is There Any Good News Left? Split-Dollar Plans by Mark Weber, JD, CLU, ChFC, MSFS Split-dollar plan. The name sounds intriguing. What exactly is a split-dollar plan and how is it used? The basic deﬁnition: Split-dollar is an insurance policy in which premiums, ownership rights and death proceeds are split between an employer and an employee or a parent and a child. The employer is responsible for a portion of each year’s premium which equals the increase in the cash value, and in some cases, the employer pays the entire premium. A beneﬁciary chosen by the employee splits the death payment with the employer.1 In 1964, the IRS issued Revenue Ruling 64-328, which established the favorable tax treatment of split-dollar life insurance. Since that time, businesses have used split-dollar as a method to allow executives to purchase life insurance at a reasonable cost. Executives have traditionally used the life insurance for survivor income, estate liquidity needs or to fund buy & sell agreements. The two primary features that drove the popularity of splitdollar arrangements were: 1) the measure of the “economic beneﬁt” taxed to the executive and 2) the cash value that accrued to the executive without being taxed. Example Corporation A provides a $1,000,000 split-dollar plan for a 35year-old executive. The corporation pays the entire premium for 30 years, at which time no further premiums are due. When the executive retires at age 65, he repays the corporation for all of its premiums from the policy’s cash value. At age 65, the executive owns a $1,000,000 paid-up life insurance policy. 30-Year Summary Corporation Cumulative Premium Paid $368,000 Cumulative Tax Paid $11,900 Executive Net Cash Value at 65 $325,500 Paid Up Defined Benefit $1,000,000 At age 65, the executive receives cash value of $325,500, on which he has paid tax of $11,900. This is equivalent to over 20 percent internal rate of return. If death were to occur at age 65, the internal rate of return would exceed 26 percent. In a traditional compensatory arrangement, when an employer pays its employee, the employee reports the full amount of the compensation (or premium, in the case of life insurance) as income. In the above example, when the employer pays an annual premium of $12,274, one would reasonably expect that the employee would have to report the full $12,274 as taxable income. For split-dollar arrangements, however, the IRS ruled that the appropriate amount of taxable “economic beneﬁt” received by the employee is determined not by the actual premium, but by a government table. The amounts were a fraction of the premium. Using the hypothetical situation above, while the 27 SILVERLINK — SPRING / SUMMER 2008

Table of Contents Feed for the Digital Edition of SilverLink - Spring/Summer 2008

SilverLink - Spring/Summer 2008 Contents Risk Management: Mitigate & Educate Disastrous Distractions Accounts Receivable BoomerCare Risk Reduction, What’s Your Function? Time Out! Double Down Employee Benefits: Who’s Paying Whom for What? Time to Reconcile Keep Your Eye on the Pension Prize Show Me the Money Private Client Services: A Generous Strategy Is There Any Good News Left? Special Insurance for Special Times Client Spotlight: Omaha Performing Arts Internal Happenings: SilverStone Group Wellness Activities Group

SilverLink - Spring/Summer 2008

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